Prospaq Group Pte Ltd v Yong Xing Construction Pte Ltd

• Jurisdiction: Singapore
• Judge: Pang Khang Chau JC
• Judgment Date: 05 February 2018
• Neutral Citation: [2018] SGHC 27
• Court: High Court (Singapore)
• Hearing Date: 27 March 2017,08 September 2017,09 June 2017,07 July 2017,15 January 2018,11 August 2017,18 December 2017,06 November 2017,21 July 2017,30 June 2017,24 April 2017,22 September 2017,12 May 2017
• Docket Number: Companies Winding Up No 252 of 2016
• Plaintiff Counsel: Nicholas Aw and Annsley Wong (Clifford Law LLP)
• Defendant Counsel: Eugene Thuraisingam, Suang Wijaya and Teo Shermin (Eugene Thuraisingam LLP),Dhanwant Singh (S K Kumar Law Practice LLP),Sheryl Ang and Claire Yuen (WongPartnership LLP),Chermaine Tan Si Ning (Patrick Ong Law LLC),Gopal Perumal (Gopal Perumal & Co),Peng Yin-Chia (Jusequity Law Corporation),Vinna Yip (Tan Kok Quan Partnership),Favian Kang and Chia Xin Hui (Eldan Law LLP),Darren Tan (TSMP Law Corporation),Christopher Goh (Goh Phai Cheng LLC),Mark Lam and Beitris Yong (Central Chambers Law Corporation),Madeline Yeo and Spring Tan (KhattarWong LLP),Mirza Namazie and Ong Ai Wern (Mallal & Namazie),Ho Shao Hsien and Lorenda Lee (Eldan Law LLP),Raymund Anthony (Gateway Law Corporation),Shu Shin Yee (Malkin & Maxwell LLP),Justin Phua (Justin Phua Tan & Partners),Wong Tian Ying (Fortis Law Corporation),Timothy Ong (Timothy Ong & Partners),Elvis Lim and Juliet Chee (in persons),Joanna Wan (in person),Thetsunaing (in person),Pillai Vik (in person),and Wileeza A Gapar
• Subject Matter: Companies,Winding up
• Published date: 18 September 2018

Pang Khang Chau JC: Introduction

Companies Winding Up No 252 of 2016 (“CWU 252/2016”) was an application commenced on 9 November 2016 by Pan-United Concrete Pte Ltd (“Pan-United Concrete”) for the winding up of Yong Xing Construction Pte Ltd (“the Defendant”). After several adjournments and substitution of plaintiffs, I ordered the winding up of the Defendant on 15 January 2018 on the application of the substituted plaintiff, Prospaq Group Pte Ltd (“Prospaq Group”).

Prospaq Group based its application on a judgment in default of appearance dated 23 November 2016 for the sum of $206,647.80 (“the Judgment Debt”) and a statutory demand issued on 29 November 2016 for the Judgement Debt, which statutory demand remained unsatisfied as of 15 January 2018.

At the hearing on 15 January 2018, the Defendant did not dispute the Judgment Debt. Instead, it sought an adjournment to negotiate a settlement with Prospaq Group and other creditors. Prospaq Group and two other creditors opposed the adjournment while the remaining creditors took no position. No creditors spoke in favour of an adjournment. Considering that the Judgment Debt was undisputed and that the Defendant had already been given more than a year to settle it, I declined to exercise my discretion in favour of a further adjournment and decided to accede to Prospaq Group’s application to wind up the Defendant. The Defendant has appealed against my decision.

Background The Defendant

The Defendant was incorporated in 2004 as an exempt private company limited by shares. Its principal activity was building construction. Its sole director and sole shareholder was one Mr Li AnQuan.

According to information filed in court by the Defendant in support of its application for the court to order a meeting of creditors to consider a proposed scheme of arrangement (“OS 283/2017”): the Defendant had a paid up capital of $6.5 million; in 2014, it generated $41,915,216 in revenue from which it made a profit of $3,010,061. Its net assets at the end of 2014 was $6,824,692; in 2015, it generated $39,790,299 in revenue from which it made a loss of $4,790,538. Its net assets at the end of 2015 was $2,034,154; in 2016, it generated $24,350,006 in revenue from which it made a loss of $4,438,116. Its net liabilities at the end of 2016 was $2,093,049; as of March 2017, the Defendant was owing creditors more than $14 million and was continuing to incur monthly operating expenses in the region of $200,000 to $300,000.

The financial information for 2014 and 2015 were based on audited financial statements while that for 2016 was not. The court had not been provided with any other information about the Defendant’s financial position in 2017.

Procedural history Moratorium granted to allow proposal of scheme of arrangement

After Pan-United Concrete filed CWU 252/2016, the Defendant applied in Originating Summons 1277 of 2016 (“OS 1277/2016”) for a moratorium pursuant to s 210(10) of the Companies Act (“CA”). I heard OS 1277/2016 on 15 December 2016 and granted a 12-week moratorium. Proceedings in CWU 252/2016 were stayed while the moratorium remained in force.

Dismissal of application for scheme of arrangement

On 9 March 2017, I extended the moratorium for a further four weeks to allow the Defendant more time to file its application under s 210(1) of the CA for the court to order a meeting of creditors to consider a scheme of arrangement proposed by the Defendant. This application (ie, OS 283/2017) was filed on 13 March 2017 and heard by me on 20 March 2017. On 27 March 2017, I dismissed OS 283/2017 with the following brief oral grounds:

First, I have serious concerns about the level of transparency for the entire process.

To give an example, at the hearing in December last year, the company filed a supplementary affidavit which included the salary slips for all the workers in order to demonstrate that the withdrawal from the Company’s bank accounts that took place shortly before the hearing were all for payment of salary. The company was very careful to include salary slips of only the construction workers but not those of the office staff of the Company thereby avoiding any disclosure of the amount of salary which Mr Li and his family members were drawing from the company. It was several hearings later when I kept pressing for further breakdown of the salary information that finally, in late February, we received information about how much monthly salary Mr Li and his family members were getting from the Company over the last several months.

When the figures comparing the liquidation scenario and the scheme scenario were presented last December, the only operating expenses taken into account in the proposed scheme scenario were the salary of staff. This clearly cannot be right because the expenses of company cannot be just the salary of staff, so again I had to press the Company to disclose what other operating expenses there were. This is another example of the Company not being upfront and transparent with information.

Then, there was a late discovery of half a million worth of GST owed to the government and at the most recent hearing last week, I was informed that there was half a million worth of debts owed to sub-contractors which were not previously mentioned.

And the status of the debt which the Company owes to the director, Mr Li Anquan, and how that was to be treated if the scheme was to be approved was not really explained until I pressed for it at the hearing last week.

One of the features of the scheme that was touted since the December hearing was that the scheme manager’s cost would be paid for by Mr Li and would not come from the Company. The scheme document does not actually reflect this or in any way seek to make this a binding condition which the creditors can rely on. Instead, the scheme manager continues to be listed as a creditor of the company, and a creditor that is not bound by the scheme proposal.

Coming to the feature of the scheme itself, in December, the rough scheme proposal painted a picture that under the scheme scenario, there would be a payout of close to S$ 8 million which, based on the calculations at that time, would have amounted to a 68% recovery for the unsecured creditors. The proposal that was on the table at last week’s hearing involved a payout of $4 million. That is half the amount. And even though the scheme document says this $4 million represented a 40% recovery, that was based on the assumption that the amount of debt was $10 million. But we heard at the last hearing that up to the filing of the last affidavit, the independent accountant had acknowledged that the debts were $ 14 million and could continue to increase.

I have looked at the documents sent in by creditors after the aging summary of the debts prepared by the independent accountant were distributed to creditors. Many creditors disputed the amount of debt set out in the aging summary. And if you were to look at the amount in dispute, they could easily add another $1 million to the total debt. So the payout of $4 million, would be a recovery rate of 28.7% if you assume the debt is $14 million and this could drop to 26.8% if you assume the debt is $15 million.

Using the $15 million figure as the rule of thumb, the recovery rate in the liquidation scenario is going to be 16.4%. The liquidation scenario in the scheme document actually doesn’t take into account the value of movable assets in the Company’s possession such as plants and equipment. So if you include the movable assets, there is a possibility that the recovery rate in the liquidation scenario could go up to close to 20%.

So what we are really looking at is a scheme which essentially asks creditors to wait for another 2.5 years for a chance to get possibly 7% to 10% more payout of their debt amounts than in the liquidation scenario. But during this period of 2.5 years, there are many many more risks that the creditors are being asked to bear, like the risk of projects not completing, the risk of the company not being able to get payments from its debtors, and the risk of UOB winding up the company because Mr Li may not be good for his personal guarantee for the shortfall of $350k.

I accept that the applicable legal principle is that the court at the s 210(1) stage should not consider the attractiveness of the scheme or the benefits that the scheme would bring to the creditors but it is equally a principle that the court at the s 210(1) stage should not act in vain. So the court is entitled to form the opinion that calling a meeting would be an exercise in futility and not agree to let the meeting proceed.

The classic statement of when the court would exercise this discretion is when it is obvious that at least 25% in value of the creditors would oppose the scheme, as that obviously means that there is no point calling the meeting. But that cannot be the only scenario where the court will exercise such a discretion. From the many creditors who spoke out at the last hearing, a large number opposed the scheme. None spoke out in favor of it. So even though, the value represented at the last hearing did not amount to 25% of the debts, the remarks of counsel for the creditors at the hearing gave me a sufficient idea of how the vote is likely to go if the meeting is called.

I am also mindful that even if the creditors were to vote in favor of the scheme, the court retains a discretion under s 210(3) not to approve the scheme. And at that point, the court can take into account the fairness of the scheme and whether a reasonable person would have gone along with the scheme. These principles are well established in case law. In order for the court not to act in futility, the court is entitled to look ahead to what it might do at the s 210(3) stage. Therefore, having regard to the features of the scheme I have just described, I am of the view that the scheme is...